The exciting new digital economy has highlighted an aspect of systems commonly called the "network effect." Basically, this is the recognition that in a network or online community, possible transactions (thus, potential value) can be realized through the interaction of almost any combination of nodes (people, links) in the system. Therefore, each additional person who joins an online community such as eBay or AOL raises the number of possible interactions (transactions) in the network by a multiplicative rather than an arithmetic factor. Conversely, each additional customer that a company such as Ford is able to attract adds value in a predictable and linear manner. Because network- based businesses such as eBay are able to attract new customers largely on the value (i.e., size) of their existing network or community, adding customers has a momentum-building impact that goes far beyond anything realized in a traditional business.
Assuming that a company has a large enough customer base to remain viable and provide a competent level of service and support, the quality of the customer experience in a traditional line of business does not directly correlate with the size of the customer base. Buying an automobile or an appliance from the number two or three supplier can be a fully satisfactory experience, and the customer is not necessarily missing anything that the customer of the market leader has enjoyed. Conversely, the quality of the customer experience for a company such as eBay is indeed a factor of the number of people in the network. Using the second or third most popular auction site means that your shopping experience is indeed less rich (i.e., more limited due to less possible interactions) than that which you would have enjoyed by using the market leader. As networks grow, they become ever more valuable.
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